Are you ready to buy a home? Often seen as part of the American dream, home buying is a goal of many people as they move through adulthood. If this is your first home, you probably have a lot of questions about mortgages, sometimes called home loans, and how they work.

A mortgage is a loan that allows people to buy a home. In most cases, the buyer will need to save up a down payment, which ranges from 3 to 20 percent of the home’s price. Some programs are available that allow for no down payment. The bank will pay the balance of the price and the new homeowner will make monthly payments back to the bank to cover the original cost plus interest.

Your first step should be to contact a mortgage specialist. That individual will walk you through the application process. You will need to show that you have the income required to make the payments each month. The bank or mortgage company will also check your credit to see if you have paid your bills in the past. If you have negative items on your credit report, you might need to take actions to resolve them or wait a certain period before you will be approved.

You do not need to get a mortgage through your own bank, though that is an option. A mortgage broker will be able to show you several lenders to compare. You will want to look at the interest rates and the fees for the loan and make a decision from there. Ask your real estate agent as well as friends and family members for a referral to a trusted mortgage broker.

Your lender will determine the interest rate for the mortgage by taking into consideration your credit score, your down payment and the loan-to-value of the home. (The loan-to-value is the percentage of the home’s value that you are financing.) The higher your credit and the lower your loan-to-value, the lower your interest rate will be. There are also some federal programs available, including FHA, VA and USDA, that can lower your interest rate.

Most mortgages for first-time homebuyers in the United States are for 30 years. People who have a larger down payment saved up, who are selling one home and buying another, or who don’t mind having a larger monthly payment in exchange for a shorter mortgage can get 10- or 15-year mortgages.

Yes. In fact, some sellers won’t entertain offers from potential buyers who haven’t gotten pre-approved for a mortgage that will cover the cost of the home (less their down payment). Your lender will be able to walk you through the pre-approval process. This gets much of the paperwork out of the way before you actually apply for the mortgage.

Your mortgage payment will include not only funds toward the principal (the home’s cost) and the interest but also, in many cases, property taxes and homeowner’s insurance. If you are putting down less than 20 percent and your loan does not forbid it, you will also pay private mortgage insurance, or PMI. Also, often HOA fees, if any, will be included. The amount of your monthly payment will fluctuate from year to year depending on your insurance and taxes, but you can use an online mortgage calculator to get a good idea of what your payment will be.

A mortgage broker is an individual who acts as an intermediary between the buyer and the lending institution. A broker can help you if you have a low credit score, no down payment or some other circumstance that makes it difficult for you to find a lender who can accommodate your needs. They are also good for anyone who does not know how, or have the time, to shop around for the best interest rate, because the mortgage broker will do that job for you.

Mortgage Tips

Save up a higher down payment if possible. This will not only lower your mortgage payments by reducing the principal of the loan but can also lower your interest rate by reducing the loan-to-value of the home.

Pay extra toward your mortgage each month. For most loans, any extra funds you send to your mortgage company will go toward the principal. This means that it will knock payments off the end of your loan. Sending in even a hundred dollars extra each month might reduce your payment period substantially. You’ll be provided with an amortization calendar that will show you how much you will owe each month; ask your real estate agent how to use it to learn how much you can save by paying extra.

Shop around for homeowner’s insurance. Keep in mind that you will be paying the premiums as part of your mortgage. Ask if there are discounts available for having a fire extinguisher, having metal straps placed on your roof, installing a security system, and other actions you might be able to take to protect your home. These discounts can reduce your monthly mortgage payments.

Check your credit. Knowing your credit score and whether you have outstanding debts that need to be settled will help you narrow down your options in terms of finding a lender.

Compare the interest rates and fees of several lending institutions. If you do not have the time or ability to do this, consider hiring a mortgage broker to do it for you.

Ask your lender about special programs that you might qualify for. In some rural areas, for example, you might qualify for a USDA loan. First-time buyers can often qualify for an FHA loan, and veterans might be eligible for special veteran’s loans. These programs can all reduce your interest rate and your monthly payments.

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